Maryland, Michigan take diverging paths in deregulation

March 12, 2006|By JAY HANCOCK

Maryland and Michigan were electricity twins in the 1990s. Served by nearby nuclear and coal generators, households in both states bought kilowatts for roughly $1,050 a year - a little over the national average.

Then they took divergent roads to deregulation, and that has made all the difference.

Customers of Baltimore Gas and Electric Co. are due for a whopping 72 percent price jump after July 1, when a transitional rate freeze on electricity expires. Detroit Edison customers, on the other hand, saw only a 9 percent increase when their rate caps were lifted Jan. 1, says a Detroit Edison spokesman. The Baltimore family that will pay $1,800 a year for juice after July 1 would pay $1,200 in Detroit.

And therein, as they say, lies a tale.

Coal and nuclear generators have become the cheapest way to make electricity in recent years as prices soared for alternative fuels oil and natural gas. You'd think that would leave ratepayers in both Michigan and Maryland in great shape.

But while Michigan forced Detroit Edison to keep its coal and nuclear plants and pass the now-low cost to ratepayers, Maryland politicians tried to promote competition by making BGE shift ownership of its low-cost plants to someone else - in this case, to its parent company, Constellation Energy.

Michigan partially deregulated. Maryland went whole hog.

The result: The Constellation plants sell electricity to anybody for any price they can get, reaping nice profits in today's inflated market instead of passing savings from low production costs to BGE customers, as would have happened without deregulation. And of course the promised competition from companies offering households a better deal never happened.

While Detroit Edison customers aren't thrilled about a 9 percent increase, "when you start looking around at other states, I think Michigan's system has worked," says J. Peter Lark, chairman of the Michigan Public Service Commission.

`The dark spread'

The surprise bonanza for Constellation and other owners of coal and nuclear plants has become the talk of the industry. "The dark spread," people call it, referring to hidden markups and fat profits for coal and nuclear plants as electricity prices soar.

In any market, prices get set at the margin - by the next unit of supply meeting the next piece of demand. The marginal price for megawatts these days is determined by natural gas generators because they're cheapest to build and easiest to flip on and off.

And the price of natural gas to fuel them has gone nuts, doubling from already high levels after Hurricane Katrina and staying up while BGE solicited offers from Constellation and other electricity vendors. Coal prices also have risen, but not as much, and the cost to produce nuclear power has been falling.

Calling dark-spread profits a "windfall" for deregulated coal and nuclear plants, Wall Street's Calyon Securities noted in an October report that such facilities "have been experiencing rapidly increasing power margins as natural gas prices continue to rise."

More than half the electricity at BGE's former plants came from coal; more than 40 percent came from nuclear. To get an idea of how golden these facilities look in today's market, check out figures from the Nuclear Energy Institute.

In 2004, it cost less than 2 cents an hour to make a kilowatt with coal or nuclear generators, while the cost of a kilowatt-hour from oil or natural gas generators was more than a nickel. That's 150 percent higher. Data for 2005 aren't available, an NEI spokesman said, but if anything the cost advantage of coal and nuclear has probably grown.

So it's 2 cents an hour for a kilowatt made by BGE's old Calvert Cliffs nuclear plant. But for you, after July 1, once Constellation sells it to BGE and it lands in your television, it'll cost 14.8 cents. The difference isn't all profit, of course. Delivery and administrative costs eat up most of it.

Even so, Detroit Edison, using similar plants and serving a similar market, charges only 10 cents a kilowatt hour - a third less.

Probably nobody knew coal and nuclear plants would become so profitable thanks to terrorists, wars, hurricanes and other factors driving up oil and gas prices. Constellation has already sold much of the future juice from the former BGE plants at prices lower than what it could get in today's market.

Nevertheless, savings that once would have passed from BGE plants to BGE customers surely helped stoke Constellation's 45 percent profit jump in its latest quarter.

"In fairness to Maryland, Michigan was the last state to pass a restructuring law, so they had a little bit of a heads-up" on deregulation booby traps, says Ken Rose, an economist at the Institute of Public Utilities at Michigan State University. "They knew there was more of a risk in terms of letting the generation go."

A harsh light

OK. But the contrasting fates of Baltimore and Detroit still cast harsh light on Maryland's colossal misjudgment; on an intolerable threat to Maryland's economy; and on Constellation/BGE's dubious complaints about having to sell kilowatts "below market rates" before the cap expires.

Hey guys: Your generation costs are below market, too.

Maybe BGE and its long-lost plants could be reunited. What the General Assembly once put asunder, the General Assembly can try to rejoin. That would be a good start.

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